Toshiba Reaches Deal With Bain-Apple Group to Sell Chip Business

Toshiba headquarters in Tokyo. The money raised from the sale of part of its microchip business will help it repair the financial damage from a failed foray into nuclear power in the United States.Credit
Behrouz Mehri/Agence France-Presse — Getty Images

TOKYO — Toshiba, the huge but struggling Japanese conglomerate, traded some of its size for financial security on Thursday by selling off most of its profitable microchip business.

It was not the way the company, which has long been accused of being bloated and directionless, had hoped to slim down.

Toshiba said it had signed a deal to sell 60 percent of the microchip unit, Toshiba Memory Corporation, to a group of international investors that includes Bain Capital and Apple. The deal, which followed months of tumultuous negotiations, will net Toshiba about $14 billion.

Toshiba has staked its future on the sale, with the proceeds earmarked to help repair the financial damage from a disastrous foray into nuclear power in the United States. The episode threatened to bankrupt the company, one of Japan’s biggest and proudest.

Toshiba traces its roots to the 1870s, when its founders helped further Japan’s industrial emergence, building the country’s telegraph system and installing its first domestically made electric lights. If the company had collapsed, Japan would have lost a pillar of its economy and its tens of thousands of workers. It also would have lost the main contractor cleaning up the ruined Fukushima nuclear plant, which Toshiba helped build decades ago.

While Toshiba’s history in many ways embodied Japan’s blazing economic rise, some people say the stumbles that led the company to sell chip unit reflected the country’s more recent problems.

In an era when the global technology industry is dominated by nimble specialists selling cutting-edge design and software, Toshiba has been defined by a stultifying management hierarchy, a dogged focus on hardware and a scattered portfolio of businesses.

“Toshiba is one of Japan’s last zombies,” said Jesper Koll, the chief executive of WisdomTree Japan, an investment firm. “It’s the last of the big conglomerates that does not have a defined strategy.”

Similar problems have hampered other Japanese groups, but Mr. Koll said that Toshiba had been particularly slow to address them. Others, like Hitachi, another refrigerators-to-power-plants conglomerate, he said, “made hard decisions” to restructure and become more accountable to shareholders, while Toshiba delayed.

The inaction helped Toshiba executives save face, at least for a while.

But then came an accounting scandal in 2015, in which Toshiba admitted overstating its earnings by $1.2 billion over seven years. Top company leaders resigned, and investigators hired by the company blamed “a corporate culture where it is impossible to go against one’s bosses’ wishes.”

Toshiba had been covering up cost overruns at its American nuclear subsidiary, Westinghouse Electric, which it bought amid an ill-timed expansion in 2006. Those losses later ballooned further: Westinghouse sought bankruptcy protection in March, after costing Toshiba $6 billion in write-offs. Toshiba said it would stop building new nuclear power plants and focus instead on maintaining older ones.

Now, with the sale of a majority of the microchip unit, Toshiba is shrinking further.

The company had been negotiating the sale for months, with a shifting roster of potential investors. The final list of buyers, disclosed in a statement on Thursday, had some surprising omissions.

Two financial institutions controlled by the Japanese government that Toshiba had previously identified as major potential investors will not contribute money initially, the company said. The institutions, the Innovation Network Corporation of Japan and the Development Bank of Japan, may invest at a later date.

The investors were instead drawn entirely from the private sector.

In addition to Apple, they include three other American businesses: Seagate Technology and Kingston Technology, two data storage companies, and a venture capital arm of Dell, the computer maker. The South Korean semiconductor maker SK Hynix, and Hoya, a Japanese manufacturer of optical equipment, were also named as investors.

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Toshiba itself will retain just over 40 percent of the unit, one of the world’s largest producers of the flash memory chips used to store data in smartphones and other digital devices.

In negotiating the deal, Toshiba struggled to balance its need for cash and its desire to retain control of the microchip unit, which has been described as the crown jewel in its vast portfolio of businesses.

Toshiba pioneered its core technology, NAND flash memory, and although it has fallen to second in global production, behind Samsung Electronics of South Korea, the business has generated the largest share of Toshiba’s profits in recent years. Among the company’s concerns was that its technology could fall into the hands of investors, like SK Hynix and Kingston, that are also its competitors.

Although Japan dominated the global microchip market in the 1980s and 1990s, it has lost ground more recently. Tsugio Makimoto, a retired semiconductor engineer at Hitachi, said that in the past, big conglomerates were good at nurturing microchip businesses, because they had the money to finance research and build factories.

Now, as the pace of technological change has quickened, “management speed and specialization are more important,” he said.

While Toshiba will retain only a minority of the chip unit’s shares, it will still exercise significant control.

The American investors, whose precise financial contributions were not disclosed, will receive preferred shares that do not carry voting rights, Toshiba said. SK Hynix would be limited to an ownership stake of no more than 15 percent for 10 years.

Hoya is buying 10 percent. In a line that reflected nationalistic concerns about the sale, Toshiba made a point of noting that, “With Toshiba and Hoya’s investments, Japan-based companies will hold more than 50 percent of the common stock.” It added that Japanese owners would “continue to hold a majority” in the future.

In proceeding with the deal, Toshiba brushed aside objections by one of its business partners, Western Digital, the American storage company. Western Digital could still move to block the sale’s completion.

A Western Digital subsidiary, SanDisk, shares ownership with Toshiba of a flash memory production operation in Japan. Because of that, the American company contends that its approval is necessary for Toshiba to sell the chip unit. Western Digital said this week that it would seek an injunction against the deal.

If the legal battle is settled in Toshiba’s favor, or if the two sides reach a settlement, it could make it easier for risk-averse government institutions like the Innovation Network Corporation of Japan and the Development Bank of Japan to join the buyout conglomerate. That would take pressure off other investors and Toshiba’s banks, which Toshiba said had agreed to provide 600 billion yen in fresh loans.

Regardless of the legal outcome, Toshiba’s relationship with Western Digital and SanDisk has been badly damaged, presenting a challenge for the chip unit’s new owners.

“Toshiba’s flash memory success has a lot to do with its relationship with SanDisk,” said Mr. Makimoto. “There are still a lot of issues to address before Toshiba can breathe easy.”

A version of this article appears in print on September 29, 2017, on Page B5 of the New York edition with the headline: Slimming Down, Toshiba Sells Microchip Business. Order Reprints|Today's Paper|Subscribe